Investor interest in cryptocurrency and bitcoin remains high. This week, ETF investors may see the first futures-based bitcoin ETFs. Here, we discuss the introduction of bitcoin ETFs, and why they may not perform as ETF investors expect.
Set to debut this week and next week
According to this ETF.com article, October 18th could be the first effective date that two bitcoin ETFs are set to debut. And, another bitcoin ETF could become available a week later, on October 23rd, and a fourth potentially available on October 25th. But, its important to note that each of these ETFs depend on futures contracts for their bitcoin exposure. Therefore, none of them hold bitcoin to provide direct exposure to the spot market. Instead, the most direct exposure for investors seeking bitcoin remains the Grayscale Bitcoin Trust (GBTC), which typically trades at a premium. In fact, we wrote about the risks and taxation of GBTC earlier this year.
What can happen with futures-based ETFs?
Sadly, futures-based ETFs can often not match the corresponding price performance of the spot market. For example, ETF investors wishing exposure to West Texas Intermediate crude oil price changes could buy the United States Oil Fund ETF (ticker: USO) Unfortunately, a phenomenan called “contango” can occur when the price of the futures contract exceeds the expected future spot price. So, the fund loses money when it replaces expiring contracts with near-term future contracts. Consequently, over time, futures-based ETFs tend to underperform the spot price market.
“These kinds of vehicles are primarily meant to be used by active traders to hedge or short positions. They are not meant as long-term buy and hold vehicles.”
source: CNBC.com.
A better way to track bitcoin in an ETF
Fortunately, there is some good news about bitcoin ETFs. Greyscale has indicated it may convert its current bitcoin fund into an ETF. If they do, this ETF’s investment returns wouldn’t be subject to contango, and won’t suffer from the return drag of futures-based bitcoin ETFs. However, the Securities and Exchange Commission (SEC) current commissioner has stated he prefers approving ETFs backed by bitcoin futures. So, ETF investors interested in bitcoin may wish to continue to wait or seek alternatives outside the ETF space.
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